Income earned in a financial year assessed in the same financial year – Exceptions to the general rule [Sections 174 to 176] under Liability in Special Cases :

Generally, the assessment year is always ahead of the previous year. In other words, income which is earned during one financial year is not charged to tax in that very same year but in the next following financial year. To this general rule, there are certain exceptions which are as under:

Persons leaving India [Section 174]: Where it appears to the Assessing Officer that any individual may leave India during the current financial year or shortly after its expiry and t hat there is no present intention of his returning to India, the Assessing Officer may proceed to assess his total income for the period comprised in the current financial year i.e. the total income of the period from the expiry of the last previous year and if a previous year has already been determined in his case upto the probable date of his departure.

The total income of each completed previous year or part thereof including such period shall be chargeable to tax at the rates in force in that assessment year and separate assessment must be made in respect of each such completed previous year or part thereof. The Assessing Officer is entitled to estimate the income of the individual leaving India for such period or part thereof in cases where his income cannot be readily determined in the manner provided in the Act for the computation of income under each head.

For the purposes of making this assessment the Assessing Officer may serve a notice upon the assessee requiring him to furnish within such time (not being less than seven days) as may be specified in the notice a return, under section 139(2) setting forth his total income for each completed previous year comprised in the period of assessment, and his estimated total income for any part of the period. For all practical purpose this notice issued by the Assessing Officer would not be deemed to be a notice under section 139(2). The tax chargeable on any, individual under the section shall be over and above the tax, if any, chargeable under any other provision of the Act. If an assessee does not furnish the return as required by the notice of the Assessing Officer a best judgment assessment must be made on him under section 144; non-compliance with the requirements of the notice may also attract liability to penalty under section 271.

Assessment under this section may be made even on the income of the period beyond the expiry of the assessment year if the probable date of the assessee‘s departure is after the expiry of the assessment year. In addition to the issue of notice for making an assessment under this section, the Assessing Officer may as well issue notice under sections 139(2) and 148(1) requiring him to furnish a return and other relevant information within such period being not less than seven days, as he may think fit. Thus, the Assessing Officer is empowered to make more assessment than one on a person leaving India before his departure from India.

AOP or BOI or Artificial Juridical Person formed for a particular event or purpose [Section 174A]: Section 174A provides for accelerated assessments in cases of certain AOP, BOI etc. If such AOP, BOI etc. is formed or established for a particular event or purpose and the Assessing Officer apprehends that the AOP/BOI is likely to be dissolved in the same year or in the next year, the Assessing Officer can make assessment of the income upto the date of dissolution as income of the relevant assessment year. The provision is on the same basis as contained in section 174 which deals with accelerated assessment of persons leaving India.

Persons trying to alienate their assets [Section 175]: If it appears to the Assessing Officer during any current assessment year that any person is likely to charge, sell, transfer, dispose of or otherwise part with any of his assets with a view to avoiding payment of the whole or any part of his liability under the Income-tax Act, the total income of such person, for the period from the expiry of the previous year for that assessment year to the date when the Assessing Officer commences proceedings under this section shall be chargeable to tax in that assessment year itself. All the provisions of the Act shall apply to such proceeding as they apply in the case of a person leaving India.

Discontinuance of business or profession [Section 176]: Where any business or profession
is discontinued in any assessment year, an assessment may be made in that very year of
the income from business for the period between the expiry of the previous year relevant to
that assessment year and the date of discontinuance, in addition to the assessment, if any,
made on the income, profits or gains of the earlier previous year or years. Thus, the Assessing
Officer has an option to make a premature assessment of the profits earned up to the date of
discontinuance in the year of discontinuance instead of the usual financial year.

The term ‘discontinuance‘ used in this context, refers to complete cessation of the business instead of a mere change of ownership or change in the constitution of firm. A change of ownership may involve succession and, for purpose of this section, a business must be regarded as being continued despite successive changes in its ownership. Since succession and discontinuance are two mutually exclusive concepts there cannot be a discontinuance in cases where there is succession. If a part of the business of an assessee is dropped owing to its nonprofitable nature, either permanently or temporarily, it would not imply that the business has been discontinued. In other words, inactivity in trade does not lead to the conclusion that the trade has been discontinued. There may be cases where the trade may be carried on even after the dissolution of the firm or the liquidation of the company. The amalgamation of two separate and independent business belonging to two distinct owners may result in the discontinuance of those business and the change of ownership. Where the business of a joint family or a firm is split up on partition of the family or the dissolution of the firm and the business is divided into branches or portions amongst the members, it would be a case of discontinuance of the old business even if some or all the members carry on their business in the same premises and take advantages of the old business connections. This is because of the fact that in such a case of the assessee i.e., the family or the firm, has ceased to carry on the business and their is no succession insofar as the integrity of the business is not preserved as was held in Sait Nagjee Purshotam and Co. Vs. C.I.T. (1964) 51 I.T.R. 489 (S.C.).

In the case of a profession a firm may discontinue its profession though its patterns may remain in the profession and vice versa. Where a professional man joins a firm, he does not cease to carry on his profession and only when he retires from the firm and ceases to practice once and for all he would be said to have discontinued his profession even though the firm in which he was a partner might continue to function after his retirement with or without new partners. In order to constitute proper discontinuance of the profession for purposes of this section it is not essential that there should be a complete cessation of the professional practice for the rest of man‘s life. For instance, an advocate would be said to have discontinued his professional practice when he takes up a full -time assignment as a judge or a legal adviser; but after retirement or resignation from the service he is entitled to return to his professional practice again.

The total income of each completed previous year or part thereof included in the period for which assessment is to be made shall be computed separately and shall be chargeable to tax at the rate or rates in force in respect of each of the relevant assessment years. Any person discontinuing his business or profession must necessarily give notice to the Assessing Officer of the fact of discontinuance within fifteen days from the date thereof. Failure to give this notice would entail the levy of penalty under section 272. Discontinuance and dissolution of business or profession by an association or a firm do not fall within the provisions of section 176 as they are dealt with under sections 177 and 189 respectively.

In the case of profession which has been discontinued, any sum received in any year on account of the cessation of the profession by, or on the retirement or death of the person carrying on profession, after the date of discontinuance is deemed to be the income of the recipient and charged to tax accordingly in his hands as if the amount would have been included in his total income if it had been received before the discontinuance. This specific provision for taxing the receipts after discontinuance of the profession thus constitutes an exception to the general rule that professional receipts would be taxable only if the profession is carried on in the year of account: section 176(4) applies only to a profession and not to a business discontinued.

According to sub-section (3A) of section 176, in cases where any business is discontinued in any year, any monies received after the discontinuance of the business must be deemed to be the income of the recipient and must be charged to tax accordingly as his income from business in the year of its receipt if such monies would have been included in the total income of the assesses who carried on the business had such monies been actually received prior to the discontinuance of the business.

The other procedural provisions in regard to service of notice, mode of assessment, collection of tax etc. are the same as those applicable to a person leaving India, as discussed earlier